Ministry of Finance, Enterprise Accounting Guidelines - Borrowing Expenses

Issued: January 18 2001
Effective: January 1 2001
Applicability: For the purposes of these Guidelines, "borrowing expenses" mean the amortization of interest, discounts or premiums and auxiliary expenses incurred in borrowing funds, including foreign exchange losses incurred in borrowing foreign currencies; and a "special borrowing" means a borrowing specifically for the purchase or construction of fixed assets (Section Three). These Guidelines do not apply to the financing costs related to lease financing and the borrowing expenses incurred in real property development (Section Two). The Guidelines have no retrospective effect on prior incurred borrowing expenses (Section 19).

Main contents: This set of Guidelines generally focuses on expenses incurred in special borrowings. It is provided that expenses incurred in special borrowings other than auxiliary expenses shall be capitalized as a cost of the relevant fixed asset if they are consistent with the Guidelines?capitalization requirements (Section Four). Auxiliary expenses incurred in special borrowings prior to the commissioning of the relevant asset shall be capitalized; otherwise they shall be recognized as current expenses (Section Five). Specific provisions are made with respect to the commencement, suspension and termination of the above capitalization (Sections 6, 14, 15, 16 and 17). In terms of capitalization ratio, the Guidelines provide that the ratio shall be determined on the basis of the interest rate or, if more than one special borrowing is carried out in relation to a fixed asset, the weighted average interest rates (Section Ten). If a special borrowing is in a foreign currency, capitalization of its conversion difference shall be limited to that incurred in relation to the principal and interest of the amount borrowed in the current accounting period (Section 13).